Chinese venture capital investors have been pricing deals at more competitive rates and taking advantage of a widening vacuum left by Western rivals in the region.
Kuwaiti traders follow the market's movement at the Stock Exchange, Kuwait City, March 8, 2018. - YASSER AL-ZAYYAT/AFP via Getty Images
September 30, 2023
Industry insiders say that Chinese venture capital companies (VCs) are making increasing inroads in the Middle East with more aggressively priced deals and by exploiting the growing vacuum that Western competitors are leaving in the region.
This development comes against the backdrop of warming relations between China and several Middle Eastern states and a series of regional conferences this year aimed at bolstering investment in the area.
Although from a security perspective, the United States remains the dominant player in the Middle East, China has recently positioned itself as a mediator: Beijing brokered the normalization of diplomatic ties between Iran and Saudi Arabia, the two biggest rivals in the region. China also welcomed Egypt, Iran, Saudi Arabia and the United Arab Emirates to the BRICS group of major emerging economies, a move that has strengthened Sino ties with the Middle East.
In an interview with Al-Monitor, Lim Say Cheong, chief executive of the Saudi Venture Capital Investment Company, a Sharia-compliant investment firm based in Riyadh, said that Chinese VC activity in Saudi Arabia has increased.
“I know you're seeing a lot of meetings, maybe MOUs [memoranda of understanding]. But it's coming in slowly, I've seen that. Besides the French, the Chinese are also getting very active [in Saudi Arabia],” Lim added.
Like Chinese VCs, French competitors have also been actively investing in Saudi Arabia. In June, France hosted its inaugural Vision Golfe conference in Paris to forge business partnerships with Gulf countries. The conference coincided with an official visit to the French capital by Saudi Crown Prince Mohammed bin Salman.
Lim added that the Chinese VCs have often been pricing deals more aggressively than European and US VCs. Although British and German VCs have also been investing in the kingdom, Lim said, “I will say the Americans are still there — not very — but still there. . . . The dark horse I think is the Chinese.”
He said that Chinese VC investors are focusing on several sectors, among them energy (renewables and fossil fuels) as well as construction and technology.
Lim said that the market is still evolving, but he expects more large Chinese companies to open offices and establish a footprint in Saudi Arabia, and the VCs from the People’s Republic will come with them.
“Whether [it's] the Huaweis of the world, the big construction companies of the world, the Alibabas — I expect to see a bigger push by the [Chinese] government for the GREs [government-related entities] and also other competitors [to move to Saudi Arabia].”
He believes that the mood is shifting in the Middle Eastern VC space, with China becoming an increasingly dominant investor, filling a vacuum left by Western investors and Gulf states relying less on Washington for support amid high energy prices due to inflation and the Ukraine war. Lim said the Chinese “are very opportunistic” in this sector and, as a result, are increasing their share of the market.
Maximilian Winter is chief executive of Harmonix, a VC firm headquartered in La Quinta, California. Harmonix invests in life sciences, health care and technology across the United States, Europe, Asia and the Middle East. Winter said that the Chinese have been expanding everywhere in search of the best technologies to support their strategic goals.
“I suspect this move is due to a mix of a friendly tech investment environment in the Middle East and China's recent regulations and restrictions against some tech companies that may have made domestic investments less attractive,” Winter told Al-Monitor.
“It also helps that leadership in the Middle East is visionary for attracting talent and technology from all over the world and building a hub of excellence around the essential driving force of the global economy and the diversification of their economy. It's an opportune time for the Middle East to do this, as they have become more sophisticated in [venture] investments and are seizing the opportunity from the European and US investors who are skittish in the current environment,” Winter added.
Harmonix has noticed a trend of increasing syndication between Middle Eastern and Chinese investors in biotech — specifically in the fields of age-related diseases and longevity — and artificial intelligence–health care companies. Among the investors are F-Prime, Lilly Asia, Mubadala, Saudi Arabia’s Public Investment Fund, state-owned oil giant Saudi Aramco, Sequoia China, Tencent and others.
The state-owned UAE investment company Mubadala, for example, views health care as a national infrastructure investment “vital for the future welfare/prosperity/longevity of their citizens,” a cultural sentiment that Chinese investors seem to share, according to Harmonix partner Krish Ramadurai.
Citing anonymous sources, CNBC reported in June that more Middle Eastern VCs were looking to park their money in China. The United States is still the dominant VC investor in China, but Middle Eastern money is expected to account for around 20% of all US dollar funding by Chinese VCs.
Keeping up with the Emirates
Saudi Arabia's VC market trails the UAE's, the largest in the Middle East. According to numbers from the data firm MAGNiTT, the Emirates received $1.19 billion in VC funding in 2022 compared with Saudi Arabia at $987 million. The UAE's favorable business environment, burgeoning startup ecosystem, strategic geographic location linking Europe and Asia Pacific, and the government's support for entrepreneurs has made it attractive for VC investors.
Egypt, Saudi Arabia and the UAE are the markets in the region that attract the most VC, accounting for 65% of agreements in the Middle East and Africa in 2022, according to Mordor Intelligence.
There has been a strong appetite for financing work on projects relating to Saudi Arabia’s Vision 2030 agenda to diversify the economy away from oil. The program positions startups and small-medium enterprises (SMEs) as key factors for ensuring the kingdom's prosperity. Saudi Arabia also has a larger economy than its eastern neighbor, but Lim does not see the country’s VC market catching up with the UAE’s in the short term.
“It's too soon to say. Vision 2030 is another seven years to go. Naturally, at the pace it is growing, it could catch up," Lim said. "But be reminded that the UAE is not sitting on its laurels. It's also moving ahead and coming up with new things with these free zones to make it easier for corporations and so forth.”